David Rosenberg is Chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
It is no secret that valuations continue to be a headwind for the U.S. equity market – but this does not necessarily mean that investors should avoid the market altogether. The headline number will move around, but there will always be opportunities underneath the surface. One such area of the market that we feel presents good relative value (aside from financials – something we have been talking about lately) is the commodity space.
One way to analyze this is by looking at the performance of the S&P Goldman Sachs Commodity Total Return Index relative to the S&P 500 Total Return Index (using monthly returns). Going back to 1970, this is the lowest level of relative performance that we have ever seen; the reading as of the end June ranks among the 99th percentile, historically. Even narrowing it down to the past 10 years, the S&P 500 has returned 115 per cent on a total return basis versus -62 per cent for the S&P GSCI.
This suggests that there is scope for mean reversion in this part of the market. Investors that are patient and in it for the long term (as opposed to chasing momentum) may find better opportunities here on a risk/reward basis than in other extended areas of the market.
There is an added cherry on top in the form of research ratings by analysts covering energy and materials companies. FactSet data currently shows these two sectors are among the top four in terms of the number of buy ratings (at 54 per cent and 53 per cent, respectively.) The beauty here is that you don't have to even be bullish on the commodity markets to have a bullish view on basic material stocks, given how they are priced both in absolute and relative terms.
Perhaps it's time for investors to start dipping their toes in the water?